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The federal Qualified Opportunity Zone (QOZ) program was enacted in 2017 as part of the Tax Cuts and Jobs Act. This allows individual and institutional investors to roll over capital gains into an investment vehicle known as a qualified opportunity fund (QOF) that funds projects located in designated underserved areas. In this case, you will be able to receive significant tax benefits. With more than 8,700 Opportunity Zones in the U.S. and its territories, the program offers rich opportunities to direct new investment capital to these struggling communities, while also providing the potential for intergenerational tax relief. I will take advantage of it. In other words, it’s a rare opportunity to do well by doing good.
With certain key provisions of the Tax Cuts and Jobs Act set to begin expiring after 2026, investors have three years left to maximize the financial benefits built into the QOZ cake. facing. However, several attractive factors still make Opportunity Zones highly favorable for short-term capital deployment, from expansion proposals by Congress to specialized sector funds targeting key industries based in the target area. .
Let’s take a look at what continues to make this arena an attractive vehicle for tax-free wealth creation, even as the deadline looms.
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Core tax incentives to encourage investment in Opportunity Zones
As many readers know, the QOZ program allows investors to incorporate existing capital gains from stocks, bonds, business sales, real estate, cryptocurrencies, etc. into a qualified opportunity fund within 180 days of realizing the gain. We focus on three major tax incentives. . These funds will use the proceeds to support eligible real estate developments and operations located within census tracts designated as Low Income Opportunity Zones. From 2017 onwards, the main tax incentives to encourage investment are:
- Postpone tax payments on invested capital gains until December 31, 2026
- If held for at least 10 years, taxes payable on the appraised value of your Opportunity Zone investment are permanently waived
While a three-year capital gains tax holiday is certainly valuable, it pales in comparison to the potential of investments that can be completely exempt from capital gains taxes if held for at least 10 years.
With more than $10 billion already committed to job-creating community revitalization projects across the country, QOZ incentives have received significant attention since their bipartisan creation. However, with the deferral extension ending after 2026, investors looking to maximize value face a ticking clock with the program ending at the end of December of that year.
Unless…
Proposed bill could extend QOZ
On the political front, a bipartisan effort in Congress through the Opportunity Zone Improvement, Transparency, and Extension Act calls for strengthening and extending QOZ incentives, including:
- Making tax-free appreciation provisions permanent for long-term investments held for 10 years or more
- Capital gains deferral extended until 2028 — two-year extension to encourage continued short-term investment
- Authorizes states to designate new Opportunity Zones based on the latest 2020 Census information.
- Allows a qualified opportunity “fund of funds” by allowing QOFs to invest in other QOFs, an activity not permitted under current law.
While the fate of a bitterly divided Congress is uncertain, it is also true that Congress was similarly divided in 2017, when the original bill was passed, so hope springs eternal. Either way, the language in the latest bill shows lawmakers’ willingness to extend the most powerful tax provisions, even though parts of the law are scheduled to expire after 2026.
The rise of specialized opportunity zone fund strategies
Regardless of whether the law successfully extends the life of this program, another recent development in this area should provide further motivation to begin QOF investing. In recent years, more niche fund strategies have emerged that target specialty industries that have major locations that overlap with counties that include certified QOZs. In particular, it offers a rare opportunity to combine timely investment opportunities with the strongest tax incentives we’ve seen in more than a generation. Of course, we are talking about his QOF in oil and gas.
In oil-rich states like Texas, specialized QOFs tailor their capital raising and asset allocation specifically to the energy sector. The best-performing funds have seasoned management teams and focus on providing infrastructure financing and expansion/acquisition growth capital to service contractors starting new operations in the counties they serve.
The timing couldn’t have been better. Despite (or perhaps because of) increasing interest in electric vehicles, exploration activity has sharply declined due to the perceived decreasing need for fossil fuels. doing. And as expected as the sun rises, demand currently exceeds supply in the oil and gas sector. Perhaps in the future we will all be driving cars powered by batteries or windmills, but that future is decades away, and here in 2024 the need for fossil fuels will actually disappear. is increasing rather than decreasing.
Entering these energy-focused QOFs allows qualified individuals and institutions to strategically deploy capital gains into tangible drilling, midstream, or production assets while simultaneously repurposing those assets and activities. It can be contractually locked into still-recovering communities that are vulnerable to industry volatility cycles. New investments in these niche funds could enjoy embedded exponential growth potential as recovering oil regions rapidly ramp up production amid global supply shortages. be. Additionally, his QOZ benefits such as tax deferral and tax exemption become even more advantageous, further accelerating growth.
What are the compelling reasons to act through late 2026 and beyond?
Qualified Opportunity Zone funds targeting oil and gas remain open to those looking to align their financial goals of maximum growth and minimum taxes with significant social returns on social investment. This is an example of a sector-specific channel. Of course, returns are never guaranteed in the oil and gas sector or any other investment, and the need to work with an experienced finance team to identify suitable QOF opportunities cannot be overstated. there is no.
Although there is uncertainty about the exact duration of QOZ benefits, there are still compelling reasons for accredited investors to take advantage of qualified capital gains through this program in 2024 and for years to come. A combination of generous existing tax incentives that remain generous through 2026, future upside with potential incentive extensions, intergenerational capital appreciation tax exemptions, and sector-specific fund strategies provide outsized exposure to fast-growing markets. Opportunity zones are maintained.
Investors who are just learning about QOFs may think they’re missing the boat.In fact, while 2017 may be the ideal time to invest in QOFs, the next best time is right now.
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This article was written by and represents the views of our contributing advisors and not of Kiplinger’s editorial staff. To check your advisor’s records, SEC or together finra.
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